Takshashila-Hudson Blue Paper - Restarting the Post-Pandemic Indian Economy

The Takshashila Institution and the Hudson Institute organised a Roundtable Series in November and December 2021. The series brought together experts, policymakers, and academics from India and the United States to discuss opportunities for the two nation-states to collaborate in a fast-changing global order. The report has been compiled with support from Aditi Pathak, Rohan Pai, Sayem Raina and Siddhidatri Mishra.

Here are the key recommendations based on the deliberations at the roundtable series.

​​1. Trade 

The ongoing COVID-19 pandemic has adversely affected economies worldwide, necessitating the recovery of the trade economy. Economic nationalism has pushed many countries toward protectionism and restricted trade. The systemic deficiencies in the World Trade Organization (WTO) have hindered its role in facilitating trade. China benefited from the existing global trading system but is now trying to create its own order. 

With the WTO’s future uncertain, geopolitically adjusted global trade, characterized by a combination of regional trade blocs and smaller bilateral trade agreements, becomes the most likely route forward. Instead of turning protectionist, the US should take the lead in strengthening and participating in regional agreements. An increase in trade and openness will positively affect the Indian and US economies. The US should also be more open to skilled laborers from India.

India must continue with trade reforms and refrain from having retroactive policies. The focus should be on diversifying supply chains and not simply on shifting the supply chain hub to the US. India must focus on improving infrastructure, developing an open and trustworthy framework, and rationalizing its tariffs. India needs to urgently address unfriendly policies that target foreign investors and must continue with reforms at both state and national levels. States in India should play a larger role in attracting foreign direct investment (FDI). Protectionist policies should be removed from the menu of options.

2. Investments

India’s growth rate had been faltering. Investments as a share of GDP were falling even before the pandemic outbreak in 2020. There was a further decline in investments during the pandemic. Since domestic savings and investment are not enough, higher FDI is vital for India to accelerate growth, reduce poverty, and increase employment.

Though US investors perceive India as an appealing market, they are wary of India’s laborious regulatory framework, protectionist norms, and tax policies. Tariff hikes and protectionist measures make it difficult for foreign firms to operate out of India. Domestic content requirements disincentivize investors. Though India has raised FDI caps in several sectors, policies continue to require management and control to be in Indian hands. While the complicated labor laws increase transaction costs, retroactive tax policies erode trust. Foreign-funded investors are subject to a separate set of rules from those imposed on domestic investors. Policy unpredictability and inconsistency deter investment. There is a mismatch of sectoral understanding when it comes to US investment in India.

India should have investor-friendly policies and address the issues investors face when they deal with the bureaucracy. India needs to commit to no retroactive taxation, and it must simplify rules and regulations. India must establish a level playing field for foreign and domestic investors. States in India should have greater autonomy in attracting investments. India must attract FDI in labor-intensive sectors. There should be greater engagement between policymakers and investors. There is a need for more conversations between the US and India to address the sectoral mismatch.

3. Technological Cooperation

India and the US need to attempt to build defensive and offensive tools to restrict and attack the digital Sinosphere. India must build on its present strengths of being a software power. The US would benefit from supporting India in developing and distributing its “billion scale” platforms.

India and the US must recognize how each country’s capabilities can be harmonized to use services and create products for end-users of space and defense technologies at both the civil and military levels. India’s overreliance on Russia for military hardware can be an opportunity for the US to help India diversify its sources. India needs to reform its procurement policies.

A kind of cyber-NATO arrangement could help to align Indian and US data policy. Data extradition laws could allow US security agencies to investigate and act when India’s cybersecurity is compromised. A regional data regulation approach could facilitate the growth of tech commerce.

The Quadrilateral Security Dialogue (or QUAD) should set up a fund for semiconductor supply chain resilience. The focus should be on enabling the growth of centers for excellence that focus on comparative advantages.  The historical lack of trust between India and the US over patent laws has a spillover effect on the life sciences technology sector. There is a need to build trust between Indian and American entities to access technologies such as gene editing, mRNA, and biosensors. India needs to undertake structural reforms regulating how intellectual property is created and generated. 

4. Human capital movement

Indian immigrants in the US, as a group, are more educated than the local US population. The median household income of immigrants of Indian origin is twice the US average. The contribution of Indian immigrants to the US is immense. However, India has not successfully communicated its corporate contribution to the US. There is a failure to recognize the number of direct and indirect jobs created by Indian firms in the United States. Historically, India has benefited from emigration because, over time, many Indians returned to their country of origin and invested there. The COVID-19 pandemic is likely to affect labor flows even after the pandemic is over, leading to reduced cross-border migration. 

India needs to create 20 million jobs every year. For this to happen, India needs to move up the value chain. Indian educational institutions have huge vacancies. While a huge section of the population lacks access to skill development, some younger talented individuals prefer to migrate out for a more open political and social life.

India should work on creating its own immigration policy that focuses on attracting talent from around the world. India should address its lack of skilled workers and can explore mechanisms like career finance bonds. India needs to competitively market itself in the field of higher technological skills. Solutions such as a labor corridor for the QUAD or the creation of a separate category of US visas for skilled workers from the QUAD need to be explored. India and the US can also formulate a “twinning” arrangement in sectors like healthcare wherein US institutions can train Indian workers. Though India is one of the largest producers of scientific knowledge, Indian science is largely isolated as there is little collaborative cross-border research. US universities can benefit by having more Indian students.